A Guide to Nonprofit Accounting for Non-Accountants Simply the Basics: The Nation’s Premier Hygiene Bank

Cash-basis accounting is the more convenient method for new or small organizations, but as you achieve nonprofit growth, you should consider fund-accrual accounting for the long term. Since budgeting is a strategic activity, your CFO will usually take the lead on creating budgets. However, your accountant will typically review all budgets to ensure they’re feasible based on your organization’s current financial situation and relevant to your goals. Access affordable, scalable, expert nonprofit accounting services by partnering with Jitasa. From fundraising campaign management to productivity, explore our top free picks. Major donors, corporate sponsors, and recurring donors can all be excellent sources of reliable funding.

Understand and manage overhead expenses

Building a long-term strategic financial plan is key to setting your nonprofit up for future growth and handling unexpected expenses with confidence. This is where financial planning and budgeting tools empower you to make strategic decisions that align with your nonprofit’s needs and goals. While your nonprofit may often strive to minimize overhead, these expenses are key for sustaining daily operations and enabling growth. The statement of cash flows clearly shows how cash moves in and out of your organization, broken down into operating, financing, and investing activities. Positive net assets shows that you’re in a strong financial position, while negative net assets are a sign that it’s time to reevaluate and adjust your financial strategy to stay sustainable. Reliable financial documentation is the foundation of effective nonprofit accounting.

Key Components of Nonprofit Financial Statements

The term “overhead” has historically carried negative connotations in the nonprofit world. However, these administrative and fundraising expenses are essential investments in your organization’s capacity and effectiveness. To help you comply with nonprofit accounting standards and GAAP and overcome some of the challenges, here are some best practices to keep in mind. A well-structured nonprofit chart of accounts can help streamline this process by providing a clear framework for tracking and reporting expenses according to these categories.

• While the tips in this guide provide a starting point, your nonprofit must employ an accounting approach tailored to its financial activity, records, and goals to effectively manage its resources.
• Keep staff and board members in the loop by holding regular accounting training sessions and workshops.
• This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
• Two key pillars of nonprofit accounting standards are Generally Accepted Principles (GAAP) and the Financial Accounting Standards Board (FASB).

Budgets

Look for accounting software with robust financial reporting features and a user-friendly dashboard. Multi-entity accounting involves managing specialized processes to consolidate financial information, ensure accurate reporting, and comply with FASB guidelines and donor requirements. Your nonprofit can also be responsible for taxes on sales, real estate, and more, depending on your state of operation. After setting up their bookkeeping systems, bookkeeping for nonprofits a top priority for all nonprofits should be to understand their tax requirements. Couch explained that nonprofits risk fraudulent activity if they don’t carefully manage bookkeeping and accounting. Mistakes are often unintentional, arising from a lack of oversight or experience.

Third-party loose sheets & retracted statements not justify section 69 addition

This system ensures your financial documents are accurate, trustworthy, and translatable across a variety of audiences, including grantors and auditors. Create a comprehensive plan for implementing these standards into your daily financial activities so your team can identify any areas for improvement. Standardizing these tasks and providing clear expectations for each role helps to protect your financial data against errors. Additionally, these procedures can help your nonprofit prevent fraud or mismanagement.

To effectively track all of your nonprofit’s revenue streams, expenses, and restricted funds, you’ll need the right tools. While many organizations start out managing their finances in a spreadsheet, a specialized accounting platform will become necessary as your nonprofit grows. Navigating nonprofit accounting standards can be complex, especially for smaller organizations.

Use the tips above to get started, and don’t hesitate to contact an accountant (like our team at Jitasa!) with any questions or to take your systems to the next level. We find that small to mid-sized nonprofits benefit most from investing in the Plus or Advanced plans of QuickBooks Online. The Plus plan includes all of the essential accounting features your organization needs in a cloud-based platform and provides access for up to five users. However, if you want to add more users to your account or leverage more complex tools like batch invoices and fixed asset auto-tracking, it’s worth upgrading to the Advanced plan. While for-profit organizations use their accounting practices to help them turn a profit and pay dividends to their investors, nonprofits aren’t allowed to do this by definition.

Automated compliance reminders

Document unique donor requirements, special handling procedures, and the reasoning behind key financial policies. Cross-train staff on essential functions and maintain clear process documentation. This preparation helps your organization maintain strong financial management even when key personnel changes occur. Open communication through transparent financial records builds donor confidence. Regular financial statements help board members and stakeholders understand your financial health.

Consequently, a volunteer or staff member may be able to serve as your nonprofit’s bookkeeper, but a qualified accountant or accounting firm should handle your organization’s accounting needs. With the right accounting software, you can simplify your financial processes, stay compliant, and create a strong financial foundation for your mission’s success. Failing to closely track expenses leads to overspending, cash flow issues, or a guide to nonprofit accounting for non-accountants potential disruptions to your nonprofit operations. Overhead costs are necessary for running a nonprofit but are not directly tied to specific programs or services. Financial reporting solutions tailored to the compliance landscape, offer centralized financial data and streamlined reporting processes, making it easier to meet state requirements efficiently.

Accounting in the Nonprofit Financial Management Landscape

Reviewing the Statement of Activities monthly, quarterly, and annually is standard practice. There are approximately 1.56 million nonprofits registered in the United States according to the Internal Revenue Service. Picking the right fiscal year for your business can save you and your accountant a lot of time, money and stress.

• Correctly calculate taxes—such as federal and state income tax, FICA (Social Security and Medicare), and unemployment taxes—while ensuring timely and accurate reporting to tax authorities.
• Create robust systems for protecting funds, donor data, and organizational assets.
• Delegate your nonprofit’s accounting responsibilities to a handful of qualified, trustworthy team members.
• Your nonprofit’s balance sheet is also known as the statement of financial position.
• Working in a nonprofit allows you to quickly learn how to differentiate it from for-profit organizations.

Recognizing revenue and managing grant accounting

The 990 is required by IRS for nonprofit organizations, although some may be exempt. The form gathers information regarding the mission of the nonprofit, the programs and services provided, and the finances. Form 990 becomes a public document available to anyone who may be researching the organization. Fund accounting, commonly used by nonprofits, separates resources into different “funds” based on restrictions and purposes. The accrual accounting method gives a more accurate picture of the organization’s financial health and helps track grants and restricted funds more effectively.

For example, a nonprofit might have a restricted fund dedicated to scholarship programs and an unrestricted fund for general operating expenses. Fund accounting makes it easy to track these funds separately, preventing the misuse of donations and improving financial transparency. Fund accounting is a system designed to help nonprofits track and manage their resources more effectively.